Richard, age 40, is the owner of Auto Repair, Inc. In addition to Richard, the company has five employees. Richard wants to establish a retirement plan for his employees. He is considering two plans: (1) a Section 401(k) plan and (2) a SEP-IRA. Assume you are a financial planner and Richard asks for your advice. Answer the following questions.

a. Explain to Richard the advantages and disadvantages of each plan.

b. Assume that Auto Repair establishes a 401(k) plan. Employees can elect a salary deferral of up to 6 percent of compensation but not to exceed $17,000 (2012 limit for participants under age 50).The company makes a matching contribution of 50 cents for each dollar contributed. James, age 25, is a mechanic who has decided to defer only 3 percent of his wages because of substantial personal expenses. What advice would you give to James?

c. Susan, age 28, is the company's office manager and earns $35,000. She has worked for the company for three years. Can Richard exclude her from participating in the 401(k) plan to hold down retirement contributions? Explain your answer